Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:39]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. And those are episodes 1-3-5-7-8. and nine. One of our listeners, Karen, has also reviewed the entire catalog and has additional recommendations as foundational episodes. Ain't nothing wrong with that. And Karen's recommendations are episodes 12, 14, 16, 19, 21, 56, and 82, in addition to the first five that I mentioned. Now, I realize women named Karen get a bad rap these days, but I assure you that all of our listeners are intelligent, thoughtful, and savvy. Yes! And don't forget that the host of this program is named after a hot dog. That's not an improvement.

Mostly Voices [1:41]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 201. Today on Risk Parity Radio, we're going to do what we do best here and follow our curiosity.

Mostly Voices [1:56]

I'm intrigued by this, how you say, emails.

Mostly Uncle Frank [1:59]

And first off, we have an email from Micah. And Micah writes, hi, Frank and Mary.

Mostly Mary [2:11]

I was playing around with Portfolio Visualizer when one of my readers sent me down the rabbit hole looking at crypto and risk reward ratios. I stumbled upon what seemed to be an anomaly. GLD and SHY have nearly the exact same Sharpe and Sortino ratios. I'm not bringing this up as an investable idea or as a problem with the software. I just thought it was interesting and I thought you might too. Although, this might be part of the genius of the Golden Butterfly portfolio since it contains 20% of each of these assets. Thank you for creating my favorite podcast and keep up the great work. Micah.

Mostly Uncle Frank [2:49]

Well, Micah, I think this is a good example of how different asset classes can perform very differently in different time frames and different economic environments. If you look at these things, GLD and SHY, the first thing you need to appreciate, they haven't been around that long. GLD only goes back to 2004. And so your analysis is going to be limited to that time period. And in that time period, they have shown similar Sharpe and Sortino ratios. However, if you do a much longer analysis of these asset classes, which you can do on Portfolio Visualizer and I'll link to in the show notes, you'll see they have vastly different performances if you're getting back to data in the 1970s and using instead of the ETF ticker symbols, you're using the asset class designations for gold and short-term treasury bonds. And you'll see that gold is way more volatile and has a lower Sharpe and Sortino ratio than short-term treasury bonds. Surely you can't be serious. I am serious. And don't call me Shirley. But what you should also appreciate by looking at these things is that looking at them by themselves in a vacuum is almost useless because the Sharpe and Sortino ratios are really not designed to analyze specific assets. They're really designed to compare portfolios over a particular time frame. And so you really want to analyze these things as part of a portfolio because if you just look at individual assets and analyze them for say, Sharpe ratios and pick all the highest Sharpe ratios, you'll get a very bad portfolio because they don't mix well or they're all the same. I think the genius of the Golden Butterfly Portfolio is in its simplicity and it goes back to that original idea that Harry Brown had back in the 70s and 80s of trying to find just a few asset classes that perform sufficiently well in a variety of economic environments. That was very difficult to do back then because you didn't have all these tools or these ETFs or any way to really do this other than really guessing at it. What the Golden Butterfly represents is a much improved modification of that that actually is based on good data and analysis over a long period of time. And so you can appreciate that it's a decent choice for a Very conservative retirement style portfolio. But I'm glad you're enjoying the podcast and the tools.

Mostly Voices [5:35]

We have the tools, we have the talent. And thank you for that email.

Mostly Uncle Frank [5:40]

Second off. Second off, we have an email from Steve. Hey, Steve. And Steve writes.

Mostly Mary [5:51]

Hi, Frank. Thanks so much for your podcast. My daughters, 19 and 22, already contribute to Roth IRAs for retirement, are building emergency funds with I bonds and, although not yet earning a lot of money, have expressed an interest in creating a second investment portfolio for medium-term needs like first home purchases. This portfolio needs to have the potential to outperform a savings account or CD without significantly adding risk of loss, at least if held over time periods of three years or greater. The Golden Butterfly or Golden Ratio portfolios both show the ability to do this consistently and are what I'm likely to encourage them to consider. Having said that, do you have any rules of thumb for how to manage these accounts, especially since they will necessarily be in taxable brokerage accounts? Are there any special considerations that one might want to consider and/or be aware of? For example, one, I assume that the best way to maintain the proper allocations and minimize yearly taxes due to capital gains is to regularly add new monies to whichever asset classes are underperforming in order to avoid the need to rebalance. Sound right? In cases where doing so does not itself maintain the desired allocations, would you tend to recommend rebalancing annually, less frequently, or instead with bands? While I know you've suggested that rebalanced frequency probably does not make a huge difference for retirement accounts generally, does this type of account's purpose change your answer at all given these tax implications? Two, does the fact that gold ETFs are taxed differently than stocks and bonds impact how we manage these types of portfolios in a taxable account? Three, any other general best practices for managing these types of portfolios for ease of management? Four, finally, and more generally, in previous episodes, you've indicated that you encourage the same types of portfolios, medium term portfolios, with your own children. Based on your experience as a parent, do you have any advice for other parents, namely me? Don't be saucy with me, Bernice. On how to guide children as they move beyond relatively simple accumulation stage retirement portfolios, into investing for other purposes and time frames. What's worked for you? Or just as good, what hasn't? Thanks for your thoughts, Steve.

Mostly Voices [8:23]

I'll get you, hey, Steve, if it's the last thing I do.

Mostly Uncle Frank [8:27]

All right. Thank you for bringing this up, Steve. We haven't talked about medium term uses of risk parity style portfolios in a while.

Mostly Voices [8:35]

That's not an improvement.

Mostly Uncle Frank [8:40]

But in the past, I have communicated that my adult children do use these kind of portfolios they use in particular the Golden Ratio Portfolio or our eldest to save for the down payment for a house. And he's currently saving for the down payment for a second house for rental purposes. He's following the house hacking recommendations of Scott Trench in the book Set for Life. Which is a great book for young adults to read who are looking to get ahead financially. Now, as to your questions, yes, the best way to approach this is the simplest way to minimize the taxes. And since you are doing a lot of contributing to a relatively small portfolio, it's just as easy to add to whatever is low in terms of the allocations are concerned. and then not have to sell things or rebalance things. If you do hold this for a number of years and end up with a lot of money in it, then I suppose a rebalancing once a year might be in order, but I don't think you really need to. And what is useful about that is it minimizes the taxes and just minimizes the overall maintenance of the whole thing. The one exception I would say to that is if it's useful to do some tax loss harvesting, then you could do some rebalancing within that. But even then we're probably talking about small amounts of money here and even smaller amounts of taxes. And that was really your question one. Now as to your question two about gold ETFs being taxed differently than stocks and bonds, does that affect the management of it? No, and again not really for two reasons. First of all, the percentage of the portfolio you're going to have in gold ETFs is going to be relatively small. So you're not talking about large gains or losses anyway. And then for most younger people, they're going to be in those lower brackets, either in the teens or 20s, and so it's going to be taxed at an ordinary income rate when they sell, as opposed to the max 28% on that. I suppose the two ways of getting around those issues would to be to use gold miner stocks, like the ETF GDX, or there is a alternative gold fund called Fizz, P-H-Y-S, that at least claims to be taxed, not like gold or other gold ETFs. Don't quote me on that, but that's what they say. But I'm not sure the juice of those lemons is worth the squeeze, particularly when you consider they do not have the same diversification properties, at least not GDX from the rest of the portfolio as a straight gold ETF would. And the difference in taxation might actually be nothing if you're talking about somebody who's in one of those lower tax brackets. All right, your question three. Any other general best practices for managing these types of portfolios for ease of management, I would say just put them at a place that's easy to manage, like a Fidelity or a Schwab. I wouldn't hold this sort of thing at Vanguard given the issues they have. Because you really want to have no fee trading in fractional shares so that if the kid has an extra hundred bucks they can put it right in there and get it invested without needing to fiddle around or worry about fees. For my own son, since his retirement stuff is already at Fidelity and he already had another Fidelity account, Just adding another fidelity account for this purpose was easy peasy lemon squeezy. And so he can devote a specific dollar amount to this saving pot, if you will. But then if he's got any extra money that he doesn't need for an emergency fund or in a checking account, this is essentially an overflow account. So looking at the end of the month, if there's extra money in there, you just pull it out, move it into the new investment account, and then go ahead and invest it right away. Yeah, baby, yeah! These days you can do that all on a phone, believe it or not. All right, your fourth question opens up all kinds of cans of worms asking for general advice to give to adult children on saving and investing. Danger, Will Robinson, danger, danger. But rather than drone on for hours, let me just give you a few ideas that might be helpful. You can't handle the dogs and cats living together. My first piece of advice is the hardest one to implement, and it's just the observation that different things will motivate different people and different children. And unfortunately, there is no one thing that is going to motivate every child or every adult child. to do what you want them to do or to follow best practices in investing, etc. Crystal Ball can help you. It can guide you. Now the easy ones, of course, are the ones that have a natural inclination either for saving or investing or both. And some people do have what I call the ant brain, myself included. And what is the ant brain? The ant brain comes from Aesop's fable about the ant and the grasshopper. And the ant was the saver who put away food and survived through winter. And the grasshopper ran around all summer and had fun and didn't save enough food for the winter and then starved. That's not an improvement. And so if your child or person you are advising or trying to help has a natural inclination for an ant brain, This becomes relatively easy because they already want to save and the question is, well here's different holes or different places you can put your savings into. The problem that many ant brain people have is that they want to stuff the money under their mattress and save that way, which is not very effective or efficient over time. Forget about it. But people with ant brains understand or see that saving in and itself is a purpose or has a purpose, which is security in their minds. Grasshoppers are more difficult because that is not going to be a sufficient purpose for them to get them to save and invest. What they need is some other kind of motivation in terms of if you do this, you'll be able to buy this thing or have this house or do this at some future point in time. And that's the kind of purpose motivation that they probably need. That is the straight stuff, O Funkmaster. What's interesting about grasshoppers is often they are much more interested in the investing part of this than the saving part of it. Young America, yes sir. And so once you get them going and start showing them they can have this account and buy these things and make more money as they go, they get excited. Of course, a lot of times they get too excited and want to go out and speculate in all sorts of stuff.

Mostly Voices [16:39]

You have a gambling problem.

Mostly Uncle Frank [16:42]

So oftentimes what you're trying to do is get your ants to be a little bit more like grasshoppers and your grasshoppers to be a little bit more like ants in which they are saving, they are taking some risk and investing, but it's A moderate risk without developing a gambling problem. Uh, what?

Mostly Voices [17:01]

Well, you have a gambling problem!

Mostly Uncle Frank [17:06]

The second thing I think is important is normalizing the idea of investing as just one other thing that adults do.

Mostly Voices [17:14]

Oh, Mr.

Mostly Uncle Frank [17:22]

Marsh, don't worry, we can just transfer money from your account into a portfolio with your son, and it's gone! You have to learn how to feed yourself, you have to learn how to dress yourself, to drive a car. Then once you start getting there, then you have to have car insurance, you have to have a bank account, and then you should have three other accounts as part of being an adult. One is your work retirement account, 401k, 403b, whatever's available there. Make sure you're getting a match. the next is having an IRA, probably a Roth IRA at the beginning when you're not making as much money and then a traditional IRA later. And then you should have a separate investment account. These days, you can put even just like a hundred dollars in one of those accounts. The point is to have the account, have it already set up so that it's not a big chore to have to go and open and do these things. you want to reduce the friction as much as possible. And to do that, having the accounts open, having them set up with the bank accounts, having whatever phone apps are available to use them are the ways you do that. Because that is probably the most difficult thing to do is the friction you have at the beginning. It's like, well, I don't know how to do this and I've never done it before. Therefore, I'm going to procrastinate and not do it. that's what you need to get your kids to sit down and do and help them do it.

Mostly Voices [18:44]

And if it starts with an apple, if it starts with a walk around the block, if it starts with a book, if it starts with a journal, whatever it starts with, I'm a candidate. I'm ready to go and change my life.

Mostly Uncle Frank [18:58]

A Roth IRA is a particularly good teaching vehicle, I think, particularly if you are planning to leave some money to your kids anyway. If you are planning to do that, it behooves you and it's an all of your best interests to get that money into their IRAs as soon as possible and not having it sitting in your accounts, assuming you trust them.

Mostly Voices [19:17]

Expect the unexpected.

Mostly Uncle Frank [19:21]

Or at least trust them enough to handle a few thousand dollars. No more flying solo. You need somebody watching your back at all times. So every February in our house, we give the advances on inheritances. and depending on how much the child made, they can get up to $6,000 as their advance. And it goes into a Roth IRA and we've talked about how to set that IRA up and how to do the investing. And that becomes this teaching vehicle so they can see the account how that works. And that it's easy to do and it doesn't take a whole lot of time. And what that also does is open up a line of communication if you've been doing this since your kid was a teenager making $1,500 or $2,000 or whatever they made that year, then it becomes a more normalized process. Abby Normal. I'm almost sure that was the name. That when it comes to investing, the first stop, they're gonna come to you and say, what do I do? Or how do I do this? And then you both are gonna sit down and go through it and do it. and that can happen with that Roth IRA. And then when they get a job and they have a 401k, you sit down with them and go through that one. And then if they have other money or they want to save for a house, then you go through another process. But it's always a back and forth.

Mostly Voices [20:48]

It's like this and like that and like this and up. It's like that and like this and like that and up. Just make sure whatever you're doing is kind of appropriate to whatever time frame they're in.

Mostly Uncle Frank [21:01]

Where I think people get into a lot of trouble is overwhelming their kid or whoever they're trying to help with just too much information about, well, then you're gonna do this, and then when you turn 40, you're gonna do this, and then when you get to 50, you're gonna do this, and then you're gonna have this retirement thing, and then this. That's just too much. And that is what gets people into this non-communication which ends up going like, yeah, my dad's always lecturing me or my mom's always lecturing about my money, but I don't listen and it turns them off. Now you may have a child that just gets turned off anyway and there's not a whole lot you could do about it.

Mostly Voices [21:36]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys?

Mostly Uncle Frank [21:39]

But you've got to do the best you can do and by not overwhelming them with too much information or Something that you find exciting as a hobby, like we do here for investing, most people don't find this exciting or interesting as a hobby. They just want to do the bare minimum. Let me ask you a question, Joanna.

Mostly Voices [22:04]

What do you think of a person who only does the bare minimum?

Mostly Uncle Frank [22:12]

I thought I remembered you saying that you wanted to express yourself and feel good about the fact that They're doing the right thing and they'll reach their goals without having to do a whole lot of work or think about it too hard.

Mostly Voices [22:24]

I do want to express myself, okay? And I don't need 37 pieces of flair to do it. And this is me expressing myself, okay? There it is.

Mostly Uncle Frank [22:34]

Oftentimes if you just leave some doors open and not say, you need to come into this room and learn this right now, that's more effective. And an example of that would be you're sitting down setting up this Roth IRA, maybe you give them a little bit of money to put in it, maybe they already have a little money to put it, they do that. And you just say, and there are other things we can talk about like let me know when you think you're ready to save for a house. Just leave that door open. You don't need to go through all the mechanics of that and how to do it right then and there. Just let me know when you get your stuff for your 401k and health insurance and we can sit down and look at that. That kind of invitation is much better than a lecture. And also make sure you pick your spots as to timing. You don't need to be talking about finances every week or even every month. But maybe it's a oncE-A-Year thing and then you add in other times like the if there's a job transition or something happens, they're moving somewhere, they get a raise, they're going to get married, they're going to start having children, and that can spark other kinds of conversations. It's a trap! As things get more complicated, you always do want to return. to the idea of purpose. What is the purpose of this account? What is the purpose of this money? And just the idea that personal finance is rooted in that, that if you don't know the purpose, you can't really make good decisions about what to do. But once you've got clear on your purpose, usually it's not that hard to figure out what you should do with a particular pot of money. And along with purpose comes priorities, because You have more than one purpose for money. You've got to set priorities and put them in the right order. And sometimes that's the conversation that needs to happen. But now I do feel like I'm beginning to drone on. Since before your son burned hot in space and before your race was born. Just a couple of book recommendations for your high school graduate. I would recommend a book called so Good They Can't Ignore youre. by Cal Newport, which talks about not worrying about finding your passion, your one passion for the rest of your life at that age, but simply having the goal of developing some skills that are useful and that will make you happy with yourself.

Mostly Voices [25:15]

You know, like, numchuck skills, bow hunting skills, computer hacking skills, And then your

Mostly Uncle Frank [25:23]

passions will probably develop from that.

Mostly Voices [25:26]

Inconceivable.

Mostly Uncle Frank [25:30]

And the other book that my children have found particularly attractive and something they could follow and implement was Set for Life by Scott Trench, which has not only saving and investing advice in it, but also house hacking advice in it if they are interested in that. because that is certainly one way to get ahead very quickly. They may or may not find a lot of other personal finance books that interesting. So I would not push on the books too much, especially if you have somebody that seems disinterested in the topics. The problem with personal finance books is there's a lot of selection bias involved. So if you're like me, you've read so many of them. and you think they're all kind of interesting and great. But for people who don't like those kind of books, it's like pulling teeth to get them to read things like that. And a lot of times, probably not worth too much effort. It'd be great to have a list of personal finance books for people who do not like personal finance books. It probably would be in order of which one's the shortest, I would imagine. A book that is one page long comes to mind in my mind.

Mostly Voices [26:42]

It's called Don't Buy Stuff yous Cannot Afford. But shouldn't you buy it before you have the money? No. Why not? It's in the book. It's only one page long. So get out of debt now. Write for your free copy of Don't Buy Stuff yous Cannot Afford. And if you order now, you'll also receive Seriously, if you don't have the money, don't buy it.

Mostly Uncle Frank [27:07]

But enough of my droning and thank you for that email. Last off.

Mostly Mary [27:19]

Last off, we have an email from Keith, and Keith writes, Frank, have you been comparing the real world performance of your portfolios to the corresponding portfolio visualizer models? I've been running a portfolio that I call the DIY hedge fund for over a year now, and the performance matches the portfolio visualizer model very nicely. The recent results have been pretty grim, but it is nice to know that at least I'm not underperforming the target portfolio. Maybe you expect your portfolios to match the portfolio visualizer models exactly because you use a no-fee broker, but there might still be some slippage due to bid-ask spreads. In my case, I'm using futures contracts to make a rudimentary risk parity portfolio of stocks, intermediate-term treasuries, and gold. The base portfolio has a relatively low volatility, but it is levered up quite a bit. Based on the attached chart, it looks like my rookie trading mistakes and the fees don't add up to a significant drag on the value of the portfolio in blue and the portfolio visualizer model in green. Keith.

Mostly Uncle Frank [28:21]

Well, Keith, no, I can't say that I spend a lot of time comparing my actual performance to what's on portfolio visualizer. although they are very similar when I have done those sorts of things. What Portfolio Visualizer is best for is comparing two portfolios in what you would term ideal trading conditions. But what you have identified are the portfolio management issues that you have to deal with to minimize your transaction fees and other fees. And part of that is choosing low fee funds and part of that is choosing funds that are very liquid, so they have very small bid-ask differences, and then using limit orders as a best practice for when you buy and sell something. As you've also appreciated, the fewer transactions you have, the less chance you have of making mistakes. We all make what are called fat finger mistakes occasionally, putting in the wrong number or the wrong symbol for something. If you are using futures contracts or options contracts, you do have more of these issues and make sure that you're being mindful of the bid-ask spreads and using limit orders on those in particular. Overall, you should not have too much of a drag these days if you are careful with what you're doing. And it sounds like you are. I did enjoy looking at your chart, but there is no way I can put this into the links, but I do appreciate it and thank you for sending it and thank you for your email. But now I see our signal is beginning to fade. Before I depart, I wanted to remind you that we are advertising a promotional event for our charity, the Father McKenna Center, which is the walk for McKenna that I will link to in the show notes. If you are in the DC area, Washington DC that is, on September 10th and would like to come out, donate a little money, walk with a bunch of fun people in the area you would describe as North Capitol Hill, we would be very welcome to have you. And please let me know if you are coming. I should also tell you that I may not be able to make a podcast this weekend, but I will try to update the website. like I normally do. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, Give me some stars, a review. That would be great. Mmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [31:26]

Well, let's say I don't have enough money to buy something. Should I buy it anyway? No. Now I'm really confused. It's a little confusing at first. What if you have the money? Can you buy something? Yes. Now take the money away. Same story. Nope. You shouldn't buy stuff when you don't have the money. I think I got it. I buy something I want and then hope that I can pay for it, right? No. You make sure you have money, then you buy it.

Mostly Mary [32:00]

The Risk Parity Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.